Proceedings of the Standing Senate Committee on
National Finance

Issue 21 - Evidence

The Standing Senate Committee on National Finance met this day at 5:46 p.m. to examine the effectiveness of and possible improvements to the present equalization policy in ensuring that provincial governments have sufficient revenues to provide reasonably comparable levels of public service at reasonably comparable levels of taxation.

Senator Lowell Murray (Chairman) in the Chair.

[English]

The Chairman: We have with us a new senator, namely, Senator Day, who was just sworn in in the Senate.

Our first witness in the public hearings on the equalization issue is the Minister of Finance of Senator Day's province - that is, the Honourable Peter Mesheau, who is almost as recent a Minister of Finance as Senator Day is a senator. He was sworn in as Minister of Finance last week. Mr. Mesheau has, however, been in the New Brunswick legislature since 1977 and has served since 1999 as Minister of Economic Development, Tourism and Culture. As of last week, he became Minister of Finance. He is also is the minister responsible for the New Brunswick Liquor Corporation, the Investment Management Corporation and the New Brunswick Lotteries Commission.

Mr. Mesheau is accompanied by his deputy minister, Mr. John Mallory, also at the table. The minister has a brief opening statement, after which the floor will be open for questions and comments. Let me invite Mr. Mesheau to begin.

Hon. Peter Mesheau, Minister of Finance, Province of New Brunswick: I should like to thank you for allowing us the venue and the opportunity to review a number of key areas that we think pertinent and appropriate for your committee with regard to the whole equalization program and the impacts that it has for our jurisdiction and the other jurisdictions across the country.

You used the term "brief" opening remarks. I am typically not long-winded, but being new to the position I have a prepared statement. I want to read my statement, because there are key points that I do not want to go unaddressed, with this opportunity of getting together with you people today.

We feel privileged to be here. We have taken time out from our schedule, as you have, to deal with this issue.

I welcome the opportunity to appear this evening before the Standing Senate Committee on National Finance on an issue of importance to the Government of New Brunswick, New Brunswickers and, indeed, all Canadians. That issue is equalization. More specifically, I want to address the equalization program and its absolutely important role to the federation.

It is encouraging that this committee recognizes the importance of equalization to the federation and is undertaking a review of the effectiveness of, and possible improvements to, the present equalization policy, ensuring that provincial governments have sufficient revenues to provide reasonably comparable levels of public services at reasonably comparable levels of taxation.

The equalization program has been subject to considerable attention in both the media and academic communities recently. This not only reflects on its importance but also suggests that the time is ripe to re-examine the program and its effectiveness in addressing fiscal disparities.

On September 28, the Government of New Brunswick tabled a public discussion paper entitled "Fiscal Imbalance and Equalization: A New Brunswick Perspective," which I am tabling before you as well. The objective of this paper is to build awareness of the fiscal imbalance that exists within our country and the importance of the equalization program in addressing it and to provide the New Brunswick perspective on these issues. It also provides the basis for my appearance here today.

It is important to recognize that, within Canada, both vertical and horizontal fiscal imbalances exist among our governments. While my primary purpose today is to address the issue of horizontal fiscal imbalance within the federation, some context on the vertical imbalance is necessary to get the balance.

Vertical fiscal imbalance exists when the distribution of revenue resources between federal, provincial and territorial governments is inconsistent with the distribution of spending responsibilities. The vertical fiscal imbalance in Canada favours the federal government.

The Canada Health and Social Transfer, or CHST, provides federal support for key provincial social programs, including health care, post-secondary education and social services, and is the primary vehicle in the federation to address vertical fiscal imbalance.

The introduction of the CHST in 1996-97 was accompanied by a significant reduction in federal transfer payments in support of these programs. The reductions exacerbated the vertical fiscal imbalance by reducing revenues to provincial governments at a time when health care costs, in particular, are under considerable pressure. Despite significant recent federal reinvestments in CHST, federal cash transfers in support of provincial social programs have not yet attained 1994 and 1995 levels. At the same time, provincial program costs have grown considerably over this period and will continue to do so.

It is expected that the vertical fiscal imbalance will widen in the future. The federal government is expected to realize growing surpluses over time, whereas provinces will be challenged to balance budgets, particularly in light of growing demands on the health care system now and in the future. In the absence of further cash infusions, the federal funding share of provincial expenditures in these key program areas will continue to erode, further diminishing the federal-provincial partnership that has existed since the advent of these key social programs.

Equally important, if not more important, is the fiscal imbalance among provinces. Horizontal fiscal imbalance exists when revenue resources are unevenly distributed among provinces and territories. In the absence of some form of equalization, residents of provinces with relatively low fiscal capacity or revenue-raising ability will face even higher tax burdens and/or lower levels of public services than residents of provinces with higher ability to generate revenue.

The importance of equalization is underscored by its inclusion in section 36(2) of the Constitution. It is extremely important not to forget this:

Parliament and the government of Canada are committed to the principle of making equalization payments to ensure that provincial governments have sufficient revenues to provide reasonably comparable levels of public services at reasonably comparable levels of taxation.

Since its inception back in 1957, the equalization program has been a cornerstone of federal-provincial fiscal arrangements and has become a central feature of our federation. The 1997 report of the Auditor General of Canada reaffirmed that equalization is a vital feature, and one of the main successes, of the Canadian federation.

The equalization program is the primary vehicle in the federation to address fiscal imbalance among provinces. It goes to the root of constitutional commitment. The purpose of the equalization program is to raise, to a standard level, the per capita revenue-raising capacity of less affluent provinces, better enabling provinces to provide reasonably comparable levels of public services and taxation to their residents.

In order to have an informed discussion on the equalization program and its merits, it is important that certain misconceptions are clarified. First, all governments in Canada support the principle of equalization, not just some governments. In fact, all premiers have called for a strengthening of the equalization program as recently as this past August.

Second, equalization payments are made out of the federal treasury, to which Canadian taxpayers from all provinces and territories contribute. It is not a transfer from more affluent provinces to less affluent provinces.

Third, seven provinces receive equalization, not solely the Atlantic provinces. In the past, all provinces, with the exception of Ontario, have received equalization.

Fourth, the primary objective of equalization is to reduce fiscal disparities among provinces, not economic disparities, although it has undoubtedly contributed to the narrowing of economic disparities as well.

Fifth, maintaining a competitive tax regime is part and parcel of the federal transfer system. The constitutional commitment refers not only to reasonably comparable levels of public services but also reasonably comparable levels of taxation.

Finally, equalization is not a disincentive to economic development. It provides key support by which the provincial economies can become even more competitive.

Believe me, I saw that as recently as the last couple years when I was the Minister of Economic Development.

Governments strive for greater economic growth and self- sufficiency, independent of the equalization program.

All governments in Canada recognize the importance of a competitive economy, interprovincially and internationally. Competitiveness requires lower taxes, quality public services, a quality social safety net, and strong financial management. The equalization program is a critical tool for less affluent provinces to achieve these objectives and move towards greater self-sufficiency.

It would not be appropriate for me to appear here today and say that the equalization program does not significantly narrow fiscal disparities. It does. Without it, our province would not have the ability to provide its residents with similar levels of public services and taxation as in other parts of the country. I will provide some context of the importance of the equalization program to New Brunswick.

In 2001-02, equalization revenues for New Brunswick are estimated at $1.2 billion, or 24 per cent of budgetary revenues.

In terms of public service delivery, equalization revenues represent over 90 per cent of gross budgetary expenditures for our Department of Health and Wellness and exceed the gross budgetary expenditures on education, post-secondary education and transportation.

From a revenue perspective, equalization revenues exceed combined personal and corporation income taxes.

In the absence of equalization, New Brunswick residents would receive far less health care, far less education and other services than Canadians residing in other provinces, and face a considerably higher tax burden.

While equalization, indeed, contributes to a narrowing of fiscal disparities, there is considerable debate whether provinces have the ability, after equalization, to provide reasonably comparable levels of public services and taxation.

In 2001-02, New Brunswick's per capita fiscal capacity from own-source revenues is $4,313. After equalization, New Brunswick's per capita fiscal capacity is raised to the level of the program standard of $5,879, as is that of other recipient provinces. This translates into an equalization payment of $1,566 per capita for New Brunswick. This is not pocket change. However, is it enough to ensure that the constitutional commitment can be met?

One of the few comprehensive measures is relative fiscal capacity. Despite the narrowing of fiscal disparities that occurs through equalization, the fact remains that significant disparities in relative fiscal capacity persists, and these have been widening for years.

After equalization, New Brunswick's revenue-raising ability, relative to the national average, is only 91 per cent in 2001-02. Relative to the more affluent provinces of Ontario, Alberta, and British Columbia, it is 87 per cent, while relative to Alberta alone it is only 63 per cent.

Less affluent provinces continue to be challenged in providing similar levels of public service and maintaining tax competitiveness relative to the most affluent provinces. This has never been as apparent as in our environment of today. The personal income tax regimes and general corporation income tax rates adopted by Alberta and Ontario, and Alberta's significant investment in health care in its latest budget, are examples of initiatives that would have considerable costs for a province like New Brunswick to adopt.

Even after equalization, less affluent provinces do not necessarily have the ability to maintain a competitive tax regime or to undertake similar spending initiatives within their current fiscal frame works without considerably altering their fiscal policies.

The Province of New Brunswick strongly believes that the equalization program must be improved so that it more adequately levels the playing field among provinces.

The importance of the equalization program to New Brunswick was clearly established by unanimous approval by all members of our legislative assembly in motion 89 this past May. This motion, tabled by the Honourable Bernard Lord, Premier of New Brunswick, called upon the Government of Canada to enhance the current equalization program, including removal of the ceiling on equalization payments to ensure it meets its constitutional mandate.

New Brunswick and other jurisdictions have identified three specific improvements that would further narrow fiscal disparities and strengthen the equalization program. These include the permanent removal of the equalization ceiling, the return to a national average standard, and comprehensive revenue coverage.

The ceiling on equalization was introduced in 1982-83 as a federal affordability measure. Since its inception, the ceiling has applied in four fiscal years, with a total cost to recipient provinces of about $3 billion. The ceiling has cost New Brunswick close to $200 million. There is a good possibility that the ceiling will apply for 2000-01 and, perhaps, future years.

When the ceiling applies, equalization-recipient provinces receive entitlements that are less than what is determined by the formula. Formula-determined entitlements are scaled back to the ceiling level on a per capita basis. As a result, recipient provinces are no longer equalized to the level of the program standard, resulting in a widening of fiscal disparities that the formula is designed to reduce. In essence, the ceiling serves as a clawback of entitlements.

In April 2001, five provincial finance ministers, including my colleague, the former New Brunswick Finance Minister Norm Betts, made representations before the House of Commons Standing Committee on Finance in regards to the equalization ceiling, calling for its removal.

Provincial and territorial leaders have called upon the federal government to permanently remove the ceiling, most recently at the 2001 annual premiers' conference in Victoria, British Columbia this past August.

On principle, the Government of New Brunswick believes that the ceiling on equalization violates the spirit and intent of the constitutional commitment to equalization by limiting the capacity of the program to achieve its fundamental objective and, thus, that it should be permanently removed.

Concerning the national average standard, the 1982 equalization renewal saw a fundamental change in the program's design, including the move from a national average standard, or NAS, to a representative five-province standard, or RFPS. The move to the RFPS removed the most affluent province, Alberta, from the standard, in addition to the four Atlantic provinces. As a result, the standard to which recipient provinces are equalized was lowered considerably. Since the inception of the RFPS, recipient provinces have argued that the lower program standard has raised adequacy concerns.

A national average standard is a more accurate and true measurement of the degree of fiscal disparities that exist across our country, by taking into account the fiscal capacity of all 10 provinces in the federation. Furthermore, a national average can be perceived as more indicative of references to "reasonably comparable" in section 36(2) of the Constitution. Adopting a NAS would enhance horizontal equity and efficiency by further narrowing fiscal disparities that now persist after the current equalization program.

Currently, recipient provinces are equalized to the per capita revenue-raising capacity of the program standard of $5,879. In contrast, the per capita revenue-raising ability of the national average standard, before equalization, is $6,097, a difference of $218 per capita from the level to which provinces are equalized. For New Brunswick, this equates to a shortfall of $165 million for the 2001-02 fiscal year.

Over the 1982-83 to 2001-02 period, the average incremental annual cost of moving to a national average standard is $1.6 billion. Cumulatively, the current standard has resulted in a shortfall exceeding $31 billion over this period from what a NAS would have provided. For New Brunswick, this translates into $1.8 billion in forgone revenues.

New Brunswick acknowledges that the current cost of a national average standard may raise affordability concerns. Provincial and territorial finance ministers have identified options that address the stability and affordability issues associated with adopting a national average standard. Premiers have directed finance ministers to examine these options further.

However, the province strongly believes that a national average standard is more representative of fiscal disparities across the country and is more consistent with the intent of the constitutional commitment than the current standard. Moving to a national average standard would help ensure that residents of equalization-recipient provinces receive more truly national levels of health care and other public services at competitive levels of taxation.

One of the inherent principles of the equalization program is comprehensive revenue coverage. Since the inception of the equalization program in 1957, revenue coverage has been expanded to include most provincial-local own-source revenues.

Of particular concern to our province is a measure that was undertaken by the federal government as part of the 1999 program renewal. At that time, the federal government announced that it would only equalize 50 per cent of provincial-local miscellaneous revenues subject to equalization. Thus, for the purposes of determining equalization entitlement, only 50 per cent of these revenues are to be included in the formula. This measure is being phased in over a five-year renewal period.

As a result, equalization entitlements have been reduced. Recipient provinces are not fully compensated for fiscal disparities from this revenue source. This measure is estimated to cost recipient provinces $230 million in 2001-02, with a cost of $25 million for New Brunswick. If this measure were fully implemented in 2001-02, it would cost recipient provinces $384 million and New Brunswick $42 million.

New Brunswick believes that comprehensive revenue coverage is a fundamental principle of an effective equalization program by ensuring that overall fiscal disparities among provinces resulting from different revenue sources are captured in the program framework.

In closing, I should like to thank the committee for the opportunity to appear here today. The principle of equalization is accepted and embraced throughout Canada. It is fundamental to ensuring that Canadians, regardless of where they live, are entitled to relatively comparable levels of public services and taxation. The equalization program provides us a vehicle to address the considerable horizontal fiscal imbalances that continue to persist in our federation. What the program requires is strengthening, not a complete overhaul. This is important: It requires strengthening.

Removal of the ceiling, adopting a national average standard and restoring revenue coverage would serve to further reduce fiscal disparities among our provinces and better enable the constitutional commitment of our country to be met.

The Chairman: When you say that New Brunswick believes that comprehensive revenue coverage is a fundamental principle of an effective equalization program, may I assume that you do not agree with the proposal put forward by some in the Atlantic region to the effect that revenues from non-renewable resources should be taken out of the equalization formula?

Mr. Mesheau: We do not agree with that, no.

The Chairman: One of the advocates of that proposal, from whom we will be hearing in a few days, is Professor Boessenkool, who writes for the Atlantic Institute for Market Studies and is a former public servant, I think, in the Atlantic provinces. In any case, he is something of an expert on these matters. He attempts to persuade New Brunswick and several other provinces of the benefits that will eventually accrue from his proposal by stating that it is now widely accepted that the St. Lawrence Basin is one of North America's last remaining major hydrocarbon0-bearing basins. He says that Quebec, New Brunswick and Prince Edward Island are all clamouring to negotiate offshore agreements with Ottawa in the event that oil and gas are found in their waters. Onshore drilling is going on right now in New Brunswick.

Do you think that if circumstances change you might change your position?

Mr. Mesheau: First, "clamouring" is a relative term. I would not use that exact term. I do not see our position changing in the foreseeable future. It has been unified and we have held to it for some time. I am here today to reinforce it and I expect we would continue to do so.

The Chairman: Do you think that removing non-renewable resources would work to your disadvantage, or are you taking a position on principle?

Mr. Mesheau: We have had experience with potash in the province and that was not a positive experience. No, we maintain our approach here.

Senator Kinsella: Welcome, Mr. Minister, and congratulations on your appointment as Minister of Finance for the province.

Picking up on the last point raised by Senator Murray, it is the position of the Government of New Brunswick that on equalization you are arguing from a standpoint of principle; correct?

Mr. Mesheau: Absolutely.

Senator Kinsella: I want to ensure that the record is clear on that.

What is your estimate of the total shortfall that the Province of New Brunswick receives, given the manner in which the equalization program is organized?

Mr. Mesheau: It is in the area of $204 million per year. The ceiling is about $14 million, the national average standard component is about $165 million and restoring revenue coverage is about $42 million.

Senator Kinsella: The ceiling is off for this year, right?

Mr. Mesheau: Yes.

Senator Kinsella: Do you or your colleagues from other jurisdictions have any indication as to the position of the federal Minister of Finance vis-à-vis the ceiling in the next fiscal year?

Mr. Mesheau: The ceiling is off for the past year. The problem is the relative unknown that this ceiling imposes upon us. It goes up and down and up and down. There should either be a permanent ceiling or no ceiling. We are proposing that we should get rid of it. We are going through hoops and seeing a downturn in the economy since the second quarter this year. It makes our planning difficult.

Senator Kinsella: Obviously, that is not helpful for any minister of finance who has the obligation to make plans.

Mr. Mesheau: I learned a long time ago that you make your plan and you work it. If you cannot do that, look out, because you will set yourself up for some serious challenges.

Senator Kinsella: Would you share with the members of this committee the nature of the discussions that are ongoing at both the ministerial level and the official level with regard to the ceiling? Have there been intense meetings at the senior official level on this? If so, what is the nature of those discussions? Are there unreasonable roadblocks? It may be helpful for members of this committee to understand the process that goes on in the negotiations between the federal Department of Finance and the provincial department.

Mr. Mesheau: I will let my deputy answer that and he can give a little bit of history. He can put into context what we are dealing with.

Mr. John Mallory, Deputy Minister of Finance, Province of New Brunswick: Senators, the ceiling has been a problem for the provinces since it was implemented in 1982. It is very difficult for provinces to plan around the ceiling. It has been a problem for all receiving provinces of all political stripes for all the years the ceiling has been in force. It has been a very important issue in recent times. The federal government cut the provinces some slack for one year as a result of a premiers' conference two years ago. The problem for the provinces as a whole is that it is only off for one year and the federal government basically has not given any indication that it will change its position in that respect in the future.The result is that as we now speak the ceiling is still in place and probably in all respects will kick in and clawback entitlements from receiving provinces in the year end as I speak.

Mr. Mesheau: I spent a couple of quality days in Vancouver last week with my fellow finance ministers from across the country and the territories. Without exception, they all shared the same point of view, no matter what their political stripe. I am sure if they were here today - and I know that some of them will be talking to you in the future - there would be a general consensus as to this difficulty of planning and what is coming next, whether there will be a ceiling or no ceiling. It makes life somewhat difficult.

Senator Kinsella: Minister, do you have a general time frame as to when you have to prepare the budget for the Province of New Brunswick? In consultation with your colleagues, the finance ministers of the other provinces, is there a general idea that ministers have to submit their budgets within a certain time line? How does that relate to a final decision by the federal Minister of Finance on this matter? Or does it keep you totally behind the eight ball?

Mr. Mesheau: I think there is more pressure on me than on the federal minister to present a budget. I have to come up with a fairly workable budget by March. We will be getting into some fairly intense budget discussions with the ministers over the next little while.

One of the difficulties that New Brunswick has, as well as other jurisdictions, is communication with the federal minister. We have a meeting set for December 10. It was our desire, as a group, to meet sooner than that. By December 10, basically, the horse is out of the barn for many of us. We have to deal with the situation sooner than that. We are hopeful that we can get together with Mr. Martin some time within the next month or so because we are very much involved with the budgeting process now.

The Chairman: Your discussion of the ceiling reminds me that there is also a floor to protect the provinces. I should like to ask you or, perhaps, Mr. Mallory, your deputy minister, who has been around the department for a long time, whether in his recollection New Brunswick has ever been truly protected by that floor. In other words, has the floor ever prevented your equalization entitlement from declining precipitously?

Mr. Mallory: I am going by memory, but I believe it did help us one year. Our position in the past has been that we would trade the floor for the ceiling. The floor is important but it is not as important to us. I will not speak for any other recipient province; however, I would say that they would probably agree with me on the removal of the ceiling on a go-forward basis.

Senator Furey: Thank you for coming here tonight, particularly as you are so new to your portfolio.

I should like you to react to a comment from our federal Minister of Finance, who engaged in a discussion with my colleague from Newfoundland, Senator Rompkey, back in June before this particular committee. Senator Rompkey was saying, in general terms, what you started out to say - that is, that equalization is a good program but it needs some fixing.

Mr. Mesheau: Yes.

Senator Furey: Mr. Martin's response was this: "I do not think the fact that some provinces have not done as well as other provinces is a failure of equalization. It may be a failure of economic policy. It may be a failure of geography. It may be a failure of history. It may be a failure of many currents, but it is not a failure of the equalization program."

How would you react to that?

Mr. Mesheau: I would be generally in agreement with that. It is unfair to look at various components in isolation. I will take a look at a number of these components.

As far as equalization is concerned, we have done, I believe, reasonably well as a province. The day will come, I hope, when we will not require equalization. I would welcome that very much. However, today, and in the foreseeable future, it is very important to us. Twenty-five per cent of our revenue that is required to pay the bills in New Brunswick comes from equalization; it is still a pretty good size component for us.

Senator Furey: The issue of CHST payments is my next area of concern. They are done now on a per capita basis. I would ask you to look at a province like Newfoundland, for example, without migration and increasing disparity in, say, delivery of the costs or ability to deliver health care because, presumably, it is our young and healthy people who are going off to other provinces and other parts of the world. This means we are leaving an aging population with even more burden on an already burdened health care system. When you compare the costs of delivery of health care with provinces like Ontario and Alberta, is a per capita allocation an equitable allocation?

Mr. Mesheau: I tend to agree as far as the outward-bound young folks are concerned. In New Brunswick, we are seeing a number of folks 50 and over coming back and retiring in the province, which adds an interesting dynamic. Obviously, it adds a burden to our health care situation. Respecting health care, originally, when these moneys were coming from Ottawa, it was basically on a 50-50 basis. Their share is down to 12 per cent or 14 per cent. That is a considerable drop. It is very difficult to maintain the standards as outlined in the act.

As far as your question, with the removal of the ceiling and a fair equalization program, I would be willing to do the individual thing, yes, as far as looking at the actual number of folks and basing the health support there along those terms. You must also take into consideration what is going on with the equalization program.

Senator Bolduc: May I ask Mr. Mallory, who has been in his position for many years, what the reasons for the ceiling were in 1982. After all, Mr. MacEachen, who is from Nova Scotia, was the federal minister at the time.

Mr. Mallory: I do not know what his reasons were.

Senator Bolduc: Knowing him as I do, I suspect that he wanted to have some arguments for negotiating with the provinces. That is what I suspect. He was in a difficult situation because 1981 was the beginning of a recession, if you remember.

Mr. Mallory: The federal government put restraint on the equalization program in the early 1980s, there is no question about that. The provinces have had to live with that for 20 years. The consequences of that are that the seven recipient provinces are having a difficult time keeping up with the rest of the country.

Senator Bolduc: On the other hand, if I understand Mr. Mesheau well, the fact that people are coming back to retire means that you have a high quality of life in New Brunswick.

Mr. Mesheau: We like to think so, yes.

Senator Tunney: Welcome to the committee. It was good to meet you, minister, before this meeting started. While you were delivering your statement, I was jotting down a few notes. Some of them may be redundant, given what I heard in your presentation and what I have been able to quickly review; however, I still have a few questions.

First, would you change the formula? Second, would you expand the entire program where contributing provinces pay more and recipient provinces receive more? Third, would you abolish the ceiling forever, as well as the floor? Would removing the ceiling solve all your problems or concerns? If you had the responsibility and the authority to administer the whole program across the country, how would you do that, to make some provinces more happy than other provinces?

Mr. Mesheau: First, most of us in this country are happy, and that is a good thing. You have certainly given this new kid on the block a lot of tough questions. The question that stands out and which I can answer easily is, yes, let us get rid of the ceiling and trash it forever. We can then go through the formulas, et cetera.

It would be nice for the folks in Ottawa to listen to the jurisdictions in a very inclusive-type forum, which I think is part of the process. After what I heard last week, I have a lot of faith in my fellow finance ministers from across this country. I would be quite willing to participate with them and the right people here in this town to hammer out a workable equalization program that will put and keep smiles on everyone's face. I think it is quite doable.

I have been around a long time. I know that you do not get everything you want. I am just here asking for some of the stuff that we need. There are needs and wants; I am here today to talk about needs, not wants.

I have not answered all of your questions, but I think in a nutshell the most important thing you brought up was the ceiling. It must go, and it must stay away.

As far as working it out, I think we can do that with the other jurisdictions. I will run through a little recipe for strengthening the equalization program. Removing the ceiling violates the spirit and intent of the constitutional commitment. It effectively lowers the program standard and widens fiscal disparities. Since its introduction in 1982, the ceiling has cost my province $194 million. That is a lot of money in my neck of the woods. Adopting a national average standard would provide a more accurate measurement of the degree of fiscal disparities across the country by taking all provinces into account. That is important. We are all part of this. The impact on New Brunswick in 2001-02 amounts to $165 million. There has been a $1.8 billion shortfall for our province since the introduction of the five-province standard in 1982. The last time I checked there were a few more provinces in this Confederation than five.

Comprehensive revenue coverage is a fundamental principle of an effective program and ensures that fiscal disparities that result from different revenue sources are reflected. The 1999 EQ program renewal saw revenue coverage of the program reduced. The impact on my province of restoring revenue coverage is $25 million in 2001-02 and $42 million if the measure were fully implemented.

Senator Tunney: Are you not concerned with the abolishment of the ceiling that, perhaps, a couple of contributing provinces might then say, "This is just getting intolerable for us." They might then raise a ruckus in this country about the whole program.

Mr. Mesheau: Exactly. In my preamble, I said that you cannot individualize provinces as contributing. We are talking Ottawa and federal dollars here. We are talking about the federal jurisdiction and federal money. I tend not to say, "Here we are in New Brunswick and I need a handout from Ontario or a handout from Alberta." By God, I do not look at it that way, senator, not at all. I am here in Ottawa because I am dealing with a federal jurisdiction.

Senator Tunney: Yes. We still have a premier here in Ontario.

Mr. Mesheau: Until March, I hear.

Senator Tunney: Yes. He was talking not long ago about deducting the resource revenues from your share.

Mr. Mesheau: We all have weak moments, and I think Mr. Harris was having a weak moment. Quite frankly, once we get to a certain age - and I do not know if you have experienced it, senator - I know I have, and I think Mr. Harris probably experienced it that day - we have weak moments. The next day he said, "No, I was incorrect. That is not the spirit of the federation." I respect him for putting things right. I must give him the benefit of the doubt.

The Chairman: I have a question about the ceiling, minister. If the ceiling makes it difficult for you as Minister of Finance to plan, do you not think that the removal of the ceiling will make it more difficult for Mr. Martin to plan?

Mr. Mesheau: I have a lot of respect for Mr. Martin's capabilities. I am just a little old finance minister from New Brunswick. He is the big guy. It may, but we all have our challenges. Mr. Martin is a capable individual. If this means a little more planning on his part, I think he has the horsepower, the capability and the brainpower to do it. I am not overly concerned about that.

Senator Stratton: Thank you for coming here tonight. When you talk about an average, are you talking about a 10-province average?

Mr. Mesheau: Yes.

Senator Stratton: How do you think the federal government would react to that? They have played with these numbers over the years, if what I have read is accurate. When I hear presentations such as yours, particularly in the times that we are in, and recognizing your needs, I am always curious. I understand your needs because I am from a have-not province as well.

Mr. Mesheau: I try not to use that term, senator.

Senator Stratton: My hand is out and I say "gimme."

My present concern is with the way the fiscal situation is looking now. Mr. Martin has not come out and said anything yet. I look at the way the system works. In good times, you get more and in bad times he clamps down because he has to clamp down. If you are fiscally responsible you have to do that. Is there not another way of doing this? When I look at it, all I see is an up-and-down repetition in the cycle, and that will not change. I just cannot see that changing.

Have you looked at other methods? Talking about a 10-province average and removing the ceiling simply means that you get more money all the time. If there is no ceiling, it will climb with inflation.

You must recognize the prudence that the federal government must exercise in the event its revenues drop off the end of the table. We are not sure that is happening, but many business reports lead us to believe that it is. There must be another way of doing this. How can we build this fluctuation into long-term stability?

Mr. Mesheau: You are basically asking whether there is a way to plateau this, to get rid of the hills and valleys.

Senator Stratton: Yes.

Mr. Mesheau: We have seen some pretty good revenue generation in the last few years by the federal government. It is in a very revenue positive stance, although it is obviously facing challenges now, as are the provincial jurisdictions. There has been, however, reluctance by the federal government to enter into more open and timely discussion and better planning to work through some of these issues.

As of one week ago, the plan was that we would get together with the federal minister on December 10. This is after the events of September 11 and a lot of rather unpleasant water under the economic bridge in the last few months. It seems to me that we can do a better job of hammering out workable solutions, solutions that would level out the mountains and valleys, so that we have more consistency and continuity in what we offer.

These are fairly broad terms, but the spirit of this federation is a number of provinces living and working together. However, as far as equalization goes, I feel that I am in a country of five provinces. There is give and take at all levels. Be it defence or whatever, New Brunswickers will be there, as will the other provinces. I believe that it is fundamentally wrong to draw lines when that becomes convenient.

Senator Wiebe: My question may be difficult to answer, or you may not wish to answer it. On page 4 of your brief, you skirt around the issue a bit. This issue has been of concern to me and has given me reason to think.

I come from Saskatchewan, another have-not province, where we live next to the province of Alberta. In Canada, we are strong believers in everyone being equal and everyone having the opportunity to share the same benefits, especially as it relates to health care.

What happens in the future if a province, through good fortune, has a tremendous amount of wealth and raises the health care bar pretty high? The demand on the other provinces will be to provide a similar level of care. Is it financially feasible for the federal government to level that playing field?

Mr. Mesheau: These are almost beyond provincial jurisdiction philosophies. On health care, benchmarks have been established by the federal government to which we in New Brunswick try to adhere. It is very challenging with the escalating cost of health care to maintain some of those benchmarks. Health care dollars from the federal government declined from 50 per cent to 12 per cent or 14 per cent for many jurisdictions, and that makes it difficult to maintain standards.

The federal government sets the standards. If the federal government gives the provinces the opportunity to generate revenue through equalization, et cetera, we will maintain those standards. Some provinces may get oil rich, but I do not think that will happen to New Brunswick overnight. We in New Brunswick intend to grow our economy incrementally and successfully. With the help of the federal government, I think that we can maintain a good averaging across the country in things like health care.

I do not know what the answer is. If Alberta wants to go through the roof on health care, that is Alberta. I am prepared to try to offer a national average to the folks of New Brunswick and work to that standard.

One of the reasons I am here today is that I need the help of the federal government to maintain that averaging of health care through the act that is in place.

Senator Wiebe: Some day I would like to have the opportunity to discuss that concern philosophically with you and other ministers because it could be a problem in the future. The federal government sets the standards and every province tries to reach those standards. If one province far exceeds those standards, the political pressure on the other provinces to do the same could be very damaging not only to that province but to the entire country.

Mr. Mesheau: I suppose that as a less rich province I can talk big, but we must exercise constitutional commitment in this country. If there is a province that is less fortunate than New Brunswick, I would like to think that we would do what we could to help that province come up to the standard that the rest of the provinces enjoy.

Senator Moore: Thank you, Mr. Minister, for coming here today with your officials.

I should like to ask you a bit about the comprehensive revenue coverage aspect of your presentation for the benefit of committee members and Canadians who may be watching this hearing on CPAC.

What does that mean? Will you give us some examples of provincial-local own-source revenues and tell us what is covered and what is not?

Mr. Mesheau: This is probably the most technical and somewhat esoteric of the three components, so I will rely on my technician to give you quality answers. That is a very good question.

Mr. Mallory: There are provincial, local and miscellaneous revenues. There are really 33 equalization formulas. There is a formula for every revenue, be it personal income tax, corporate income tax, gasoline revenues, property tax, et cetera. There are 33 separate revenue sources. Under the program, all provincial revenues are aggregated, and that is used to form the basis of the calculation to determine whether a province receives an entitlement.

In the last round, the federal government finally won the day. They said, "It is a federal program." They took the one revenue source or provincial local source and said that it would not equalize 100 per cent of the revenues any longer, that over a period of years it would equalize 50 per cent. That essentially meant that only half of the provincial-local revenues would be equalized.

Senator Moore: What is the total of the 33 revenue sources in your province?

Mr. Mallory: What is the total entitlement?

Senator Moore: Yes.

Mr. Mallory: It is worth about 24 per cent of our revenues, or about $1.2 billion.

Senator Moore: Under the 1999 program renewal, you say that the federal government announced that it would only equalize 50 per cent of provincial-local miscellaneous revenues. What is that? Is that different from own-source revenues?

Mr. Mallory: There are a number of smaller revenue sources. They could be user fees as opposed to revenues like personal income taxes, corporate taxes, sales taxes and gasoline taxes.

There are a number of miscellaneous revenues that could be anything from user fees that provinces levy to some fees that municipal governments levy that are in this category.

Senator Moore: Where do casino revenues fit in?

Mr. Mallory: Provincial lottery revenues are a separate government source.

Senator Moore: They are not among the miscellaneous?

Mr. Mallory: No, they are not. Equalizing half of them essentially provides a province with half the entitlements that they would normally receive from that revenue source. In our case, the bottom line is that that decision, when fully implemented and which will be phased in over a four-year period, will deprive the province of $42 million a year in terms of what the province would normally receive.

The Chairman: Who levies the property taxes in New Brunswick now?

Mr. Mallory: The province and the municipalities both have a property tax. The province collects on behalf of the municipalities, but there is a provincial property tax and a municipal property tax.

The Chairman: Is it factored in?

Mr. Mesheau: This component is the one on which I spent the most time to get my head around. It is not the largest financially. I would say that it is the average standard that impacts us negatively. This one is technically involved.

Senator Moore: Concerning the 33 revenue sources, are those set in each province across the nation or is that 33 in New Brunswick? Do other provinces have more than that or less than that? Does the miscellaneous category go up as well? Are those items also a set listing or category?

Mr. Mallory: By and large, there are 33 provincial local revenues that are levied by the 10 Canadian provinces. All of those provinces have a tax base for those revenue sources. Some do not have any taxes on those sources. For example, Alberta does not have a sales tax. However, they still have fiscal capacity to raise sales tax revenues if they choose to do so. Basically, this is a summary of what would be a representative tax system available to all Canadian provinces. It would consist of those 33 revenue sources.

Senator Furey: Minister, I should like to take you back to your last comment in response to Senator Wiebe. You very generously said that if you were in a position to help less fortunate provinces you would like to think you would do so. Would you be prepared to support a special case for have-not provinces who are prosecuting non-renewable resources to have clawback arrangements reduced significantly? They are reduced somewhat now in Nova Scotia and in Newfoundland with oil and gas. Or would you have them eliminated until those have-not provinces become have provinces and are contributing to the federation?

Mr. Mesheau: Our position is not to do that.

Senator Furey: You will not be that generous?

Mr. Mesheau: In terms of some revenue sources, we are a have province. We are talking specifically about health care. We are not in same position, obviously, as Newfoundland and Nova Scotia right now. Quite frankly, I have not seen too many drilling rigs out in the Northumberland Strait lately looking for minerals or God knows what out there.

Senator Furey: Do you think it would make for a stronger federation if have-not provinces were given that additional opportunity to get on their feet quicker and become contributing members to the federation in a much more efficient and faster fashion?

Mr. Mesheau: Philosophically, senator, I would support that.

Senator Kinsella: Given many of the circumstances of recent weeks, this study of equalization by the committee is timely. I say that because it speaks directly to what we are as a nation. This equalization is all about sharing the wealth of the nation.

Minister, you drew our attention specifically to section 36(2) of the Constitution. There are two parts in section 36 that describe the principal of equalization, of sharing the wealth as a fundamental value of Canada. In essence, those two parts deal with ensuring that everyone catches up if they fall behind and maintaining this equalization.

In conclusion, would you speak to those two elements of equalization because it is fundamental to the work of this committee?

Mr. Mesheau: I do not have a copy of section 36(2) with me today. The key here is to put us on somewhat of a level playing field. I realize that that is extremely difficult. How level do I want it? I would like it to be fairly level.

The other component of section 36(2) is to get us out or to put us beyond the situation we are in now so that some day we can say goodbye to equalization and, some day, there may be a province next to us or across the country that needs our help. These are important things. This section I have come to know intimately in the last seven days. Those two key areas are very important, namely, a level playing field and the opportunity. I am not here looking for handouts; I am here looking for an opportunity. This money in equalization, this support, is put to good work. We do not spin a lot of tires with it. If it can help improve the economy of my jurisdiction and, ultimately, the economy of this country, then that is a good thing.

The Chairman: You have gotten these public hearings off to a good start, sir. We thank you for coming here so early in your mandate. We thank you and Mr. Mallory, your deputy minister. We wish you every success in meeting your new challenges as Minister of Finance.

Mr. Mesheau: Mr. Chairman, I appreciate your kindness here.

We have a great deal of respect for Mr. Martin and for the federal government. We look at them as very good people to do business with. It is just that there is some shoring up to do and a few issues to deal with.

The committee adjourned.